Taking a step back, today’s announcements from Apple’s special event are further evidence that the company continues to make arguably the best consumer tech products in the world from hardware to software, and the integration therein. At the end of the day, consumers have several simple criteria to evaluate their phone, and at the top of the list are battery life, speed, and camera quality. Apple delivered on all of these desires, stressing the performance of the new camera systems above any other feature.
At today’s event, the company introduced a new iPhone, iPad, and Apple Watch, and provided details around several upcoming services. Overall, we continue to feel confident that iPhone revenue will be flat to up slightly over the next year after being down 15% in the last three quarters.
The highest volume iPhone – now the iPhone 11 instead of the XR – is $50 (7%) cheaper. The price decrease came as a surprise. We think it signals a push to drive unit sales ahead of a 5G iPhone and is not a read on the macro. The entry-level price for the iPhone 11 Pro and 11 Pro Max remains the same as the XS and XS Max at $999 and $1,099, respectively.
Upgrades to the Apple Watch were subtle but important. For example, the always-on display feature eliminates a compromise that Apple made on every Apple Watch to date. Even a brief delay in the screen turning on is abnormal when it comes to glancing at a watch face. Apple Watch Series 5 seems to be all grown up and brings the digital watch on par with traditional watches in a critical use case – telling the time.
With Apple TV+ and Apple Arcade, the company is accomplishing two things:
- Apple is wrapping more services around its hardware and software ecosystem to make it stickier.
- With pricing of $4.99/month each, Apple is slowly ramping its recurring revenue per user.
The pricing of both Apple Arcade and Apple TV+ is more aggressive than we expected at $4.99/month. Apple has the advantage of monetizing an entire ecosystem (hardware, software, services), which allows them to effectively subsidize Apple TV+. Similarly, Disney has the advantage of an entertainment ecosystem built around strong IP that allows them to bring down content costs and subsidize Disney+. Netflix doesn’t enjoy the same ability, which represents a threat to their pricing power.
Missing from the event were new AirPods and the widely rumored Apple Tags. While Apple Tags represent a negligible revenue opportunity, we believe AirPods account for 3% of Apple’s revenue. A material upgrade to the form factor and functionality of AirPods would boost already great sales and continue the upward trend of Apple’s wearables business. We estimate that Apple will grow AirPods sales to 50M units this year, up from 28M last year.